German Employers and the Origins of Unemployment Insurance

Transcrição

MPIfG Discussion Paper 11/ 5
German Employers and the Origins of Unemployment Insurance
Skills Interest or Strategic Accommodation?
Thomas Paster
Thomas Paster
German Employers and the Origins of Unemployment Insurance: Skills Interest or Strategic
Accommodation?
MPIfG Discussion Paper 11/5
Max-Planck-Institut für Gesellschaftsforschung, Köln
Max Planck Institute for the Study of Societies, Cologne
April 2011
MPIfG Discussion Paper
ISSN 0944-2073 (Print)
ISSN 1864-4325 (Internet)
© 2011 by the author(s)
Thomas Paster is a researcher at the Max Planck Institute for the Study of Societies.
[email protected]
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Paster: German Employers and the Origins of Unemployment Insurance
iii
Abstract
This paper analyzes the attitudes of industrial employers during the German Empire
and the Weimar Republic towards the adoption of public unemployment insurance.
While employers initially opposed unemployment insurance, they eventually endorsed
it. What explains this shift in attitude? The paper tests two alternative theses: the conventional power resource thesis and the newer skills interest thesis. While the power
resource thesis explains social protection as the result of distributive conflicts between
employers and labor, the skills interest thesis sees it as an outcome of joint interests in
skills investment by capital and labor. The study concludes that the power resource
thesis has the greater explanatory power. Employers’ support of unemployment insurance was an attempt to defeat other policy options on the agenda rather than an effort
to promote skills investment. An unfavorable policy legacy and a sustained change in
political majorities are the main factors that explain the change in positions. Fear of rising labor costs and the erosion of work incentives shaped employers’ preferences rather
than an interest in protecting skills investments. On a more general level, the results
show the significant impact of political constraints on the positions actors take and the
importance of short-term considerations in processes of preference formation.
Zusammenfassung
Dieses Papier untersucht die Haltung industrieller Arbeitgeber zur Einführung einer
staatlichen Arbeitslosenversicherung in Deutschland zur Zeit des Kaiserreichs und der
Weimarer Republik. Arbeitgeber lehnten ursprünglich eine staatliche Arbeitslosenversicherung ab, stimmten ihr jedoch am Ende zu. Was erklärt diesen Positionswandel? Das
Papier testet zwei alternative Erklärungsansätze: die konventionelle Machtressourcenthese (power resource thesis) und die neuere Qualifikationsinteressensthese (skills interest
thesis). Die erste These erklärt den Umfang sozialer Sicherung durch Verteilungskonflikte zwischen Arbeitnehmern und Arbeitgebern, die zweite durch gemeinsame Interessen
von Arbeitgebern und Arbeitnehmern an Ausbildungsinvestitionen. Die Studie kommt
zu dem Schluss, dass die Machtressourcenthese den Haltungswandel besser erklärt als
die Qualifikationsinteressensthese. Die empirische Analyse zeigt, dass Arbeitgeber die
Einführung einer staatlichen Arbeitslosenversicherung unterstützten, um andere Optionen abzuwehren, nicht um höhere Qualifikationsniveaus zu fördern. Die Studie
identifiziert die Überwindung eines als problematisch bewerteten Politikerbes sowie
den Wandel politischer Mehrheitsverhältnisse als die wichtigsten Erklärungsfaktoren.
Die wirtschaftlichen Auswirkungen einer Arbeitslosenversicherung sahen Arbeitgeber
kritisch: Sie erwarteten primär höhere Lohnkosten und geringere Arbeitsanreize, nicht
jedoch eine höhere Bereitschaft zu Ausbildungsinvestitionen. Die Studie verdeutlicht
den Einfluss sich wandelnder politischer Zwänge auf die inhaltliche Positionierung politischer Akteure sowie ihre oft kurzfristige Orientierung bei der Präferenzbildung.
iv
MPIfG Discussion Paper 11 / 5
Contents
1
Introduction: Business and unemployment insurance
1
2
Theory: Two competing explanations
3
3
The Wilhelmine Empire: Employers against unemployment insurance
8
4
The introduction of unemployment insurance in the Weimar Republic
13
5
Changing employer positions in the Weimar Republic
17
6
What motivated industry to change its position on unemployment
insurance?
25
Conclusions
28
7
References
29
1
German Employers and the Origins of Unemployment
Insurance: Skills Interest or Strategic Accommodation?
The workers are not unemployed but unwilling to work. Above all else they want to avoid difficult labor because they now have much better unemployment insurance.
Privy Councilor Ewald Hilger (an Upper Silesian mine manager)
on March 1, 1919 (Maier 1975: 60)
A people of strong will and progressive energy would not brand itself with the stigma of inferiority … by passing a law on insuring against unemployment; that amounts to the acceptance of
a [social] cancer by the state … Let us call a halt to this greenhouse culture and acclimatize our
people to rougher weather. … Let us not forget that a healthy and just struggle for one’s daily
bread is a good thing.
Deutsche Arbeitgeber-Zeitung (1920: 1)
1
Introduction: Business and unemployment insurance
Recent research in political economy challenges the view that business interests invariably oppose social policy. According to a growing body of research that investigates
employers’ social policy interests, predominant types of employers have, in fact, historically supported major social reforms (Jenkins/Brents 1989; Gordon 1994; Swenson
2002; Mares 2003a). According to this view, employers supported the extension of the
scope and generosity of social policy because they believed that social policy would help
them to create the kind of labor force they needed. The theoretical and empirical arguments made by this strand of employer-centered research contrast with those of the
power resource approach, the conventional explanation of welfare state development,
which suggests that social policy is the outcome of class struggle (Korpi 1983; EspingAndersen 1985). Responding to this new approach, scholars building on the power resource approach and on historical institutionalism have reasserted the importance of
political conflict and class power and questioned the pro-welfarist nature of employer
preferences (Emmenegger/Marx 2010; Huber/Stephens 2001: 33; Hacker/Pierson 2002;
Kitschelt 2006: 415–418; Korpi 2006; Streeck 2011).
The purpose of this paper is to test these two alternative perspectives through an analysis of the role of employers in the adoption of unemployment insurance in Germany
in the Weimar Republic. The main argument of the paper is that a narrowing of policy
options motivated employers to abandon their opposition to unemployment insurance,
For helpful comments on an earlier version of this paper I would like to thank Juan Fernandez, Martin Höpner, Martin Schröder, and Sven Steinmo. Any remaining deficiencies are my own responsibility. Quotations are translated by the author, except where otherwise indicated.
2
rather than any intention to promote a highly-skilled workforce. While employer-centered explanations are correct in stating that employers cooperated in the adoption of
unemployment insurance in the Weimar Republic, they neglect the political conditions
that motivated their support. This paper highlights two conditions: first, changes in the
political-institutional context, from a semi-authoritarian monarchy to a parliamentary
democracy, which changed the political power structure in favor of unemployment insurance; and second, the role of a policy legacy that limited the options available to
employers. Employers did not evaluate their policy options against the background of
a “clean slate,” but rather against the background of pre-existing policies and policies
brought onto the agenda by other actors. In short, the change in employer attitudes resulted from a tightening of political constraints rather than from changes in economic
interests. I call this argument the political accommodation thesis.
I decided to focus on Germany as a crucial case. As Harry Eckstein argued, a crucial case
is one that “must closely fit a theory if one is to have confidence in the theory’s validity”
(Eckstein 1975: 118, emphasis in original). Germany is often seen as a paradigm case for
a type of economy that benefits firms relying on a high-skill production strategy (for
example, Thelen 2001; Hassel 2007; Hall 2007; Streeck 1992; Hall/Soskice 2001). These
benefits make it most likely that employer-centered explanations will hold true in this
case, as I will show in the following section. For the same reason, it is a difficult case
for the political accommodation thesis. If political constraints motivated employers to
back the adoption of unemployment insurance, this is even more likely to be the case in
countries less focused on high-skill production.
Some may argue that single case studies are not suitable for testing hypotheses, since
they allegedly do not involve variation in the dependent variable. I believe that this view
is mistaken for two reasons: First, by careful selection of the case, we can maximize the
theoretical leverage of the study. If a hypothesis holds true in a difficult case, it is also
likely to hold true in other, less difficult cases. Second, as I will show, my case study utilizes internal, diachronic variation in employer positions. The positions of employers
towards unemployment insurance changed over time, shifting from opposition to support. This variation allows us to look for conditions that may have caused this shift. In
short, the single case study, and the usage of rich historical sources it allows, has distinct
advantages for testing hypotheses about actor motivations. Theory-driven case selection and the analysis of diachronic, within-case variation allow us to go beyond mere
description and test alternative hypotheses.1
The structure of the paper is as follows: After elaborating the two competing explanations in further detail in Section 2, I provide a historical narrative of how the introduction of unemployment insurance came about. I analyze the attitudes of employers
towards unemployment insurance in the context of two political regimes, the Wilhelm1
Gerring (2007: 115–122) and George and Bennett (2005: 251–261) provide theoretical justifications for the usage of the crucial case method.
3
ine Empire (Section 3) and the Weimar Republic (Section 4), respectively, and show
how differences in political context between these two regimes and newly created policy
legacies were instrumental in making employers change their minds (Section 5). Finally,
I discuss the empirical validity of the two alternative explanations with regard to unemployment insurance in the light of the empirical evidence (Section 6).
2
Theory: Two competing explanations
This paper tests two competing explanations concerning employers’ role in the introduction of unemployment insurance in the Weimar Republic: the skills interest thesis
and the political accommodation thesis. The skills interest thesis builds on the Varieties
of Capitalism approach, the political accommodation thesis on the power resource approach and the policy feedback approach. The skills interest thesis predicts that employers supported unemployment insurance as a tool for promoting a highly-skilled labor
force; the political accommodation thesis predicts that changes in political majorities
and the limitation of policy choices motivated employers to finally accept unemployment insurance. The skills interest thesis predicts that sectoral conflicts dominated policymaking; the political accommodation thesis predicts that class conflicts dominated.
As mentioned earlier, the paper finds that the political accommodation thesis is better
able to explain employers’ support for unemployment insurance.
The skills interest thesis
The scholarly debate about the social policy preferences of employers is inspired by
the “Varieties of Capitalism” (VoC) framework developed by Hall and Soskice (Hall/
Soskice 2001). The VoC approach links social policy to investments in different types of
skills. According to this approach, unemployment insurance encourages investments in
skills that are not transferable across firms or industries (specific skills). Unemployment
insurance benefits allow the worker to make a living during periods without employment and thus alleviate the pressure on him to change his vocation, which might make
his specific skills redundant. Because of this skill-protective effect, the VoC approach
expects unemployment insurance to have a positive effect on investments by firms and
workers in specific skills (Estévez-Abe/Iversen/Soskice 2001: 180; cf. also Iversen/Soskice 2001; Iversen 2005).
Employer-centered explanations of welfare state development build on this insight to
develop causal explanations of welfare state development that put employer interests
at the center. Estévez-Abe, Iversen and Soskice (2001: 181), for instance, argue that “social protection often stems from the strength rather than the weakness of employers.”
4
They expect that in economies that rely on specific skills, “a strong alliance between
skilled workers and their employers in favor of social protection” will emerge (ibid.:
147). Iversen (2005: 13) predicts that workers and employers who depend on specific
skills will demand social protection, while workers and employers who depend on general skills will oppose protection. In a similar way, Mares argues that “for large firms,
considerations about the need to institutionalize guarantees to their workers that the
investment in their skills would not be undermined during periods of unemployment
were of paramount importance” (Mares 2003a: 147). In short, employer-centered explanations attach paramount importance to the issue of skill investments for the way
industrialists perceive welfare state institutions. For this reason I refer to this thesis as
the skills interest thesis.
Unemployment insurance is a pivotal test case for the skills interest thesis, since this
is one of the policies that are seen as central to the promotion of skill investments.
Estévez-Abe, Iversen and Soskice (2001: 152), for instance, select unemployment insurance as one of three policies protecting skill investments, in addition to employment
protection and sectoral wage bargaining. Unemployment insurance is also at the center
of the comprehensive work on employer preferences by Isabela Mares (1996a, 1996b,
1999, 2000, 2001, 2003a, 2003b, 2004). Regarding the introduction of unemployment
insurance in Germany in 1927, Mares argues that
the change in the preference of employers from a rejection of any system of compensation
against the effects of unemployment to a support of a system of contributory unemployment
insurance is not simply a change in the strategic preferences of employers (that results from the
interaction with other social actors) or of employers’ anticipation of a policy outcome that has
a high probability of being successful, but a change in the ‘real’ or ‘pre-strategic’ preference of
employers, that is in turn caused by changes in the balance of power among employers from
‘traditional’ industries (such as iron and steel) to more skill-intense industries that rely more
heavily on exports (chemicals, machine tools, electricals) and by differences in the structure of
the risk of unemployment faced by these industries. (Mares 1996b: 30)
According to this view, the change in employer attitudes from opposition to support for
unemployment insurance in the Weimar Republic resulted from a shift in power from
low-skill to high-skill sectors.
Consistent with her interpretation of business endorsement of unemployment insurance as driven by a genuine preference, Mares also argues that employer support was
crucial for the reform to succeed. Without the change in employer preferences, the introduction of unemployment insurance would have been likely to fail:
This change in the preference of employers and their final collaboration in the introduction of
unemployment insurance is the crucial factor which facilitated the passing of the unemployment insurance bill in 1927. (Mares 1996b: 5, emphasis added)
In short, according to the skills interest thesis, employer preferences constitute an important cause of welfare state expansion.
5
A similar argument is made by constructivist studies, which emphasize changes in ideas
as a source of changing policy positions. In an in-depth analysis of the origins of unemployment insurance in Germany and the US, Münnich (2010) argues that in both countries, interest perceptions and political views among employers changed in the interwar period, leading significant groups within them to see unemployment insurance as
being in their interest. In the case of Germany, Münnich argues that capital and labor in
the Weimar period shared an interest in using social policy to protect labor productivity
and human resources (Münnich 2010: 188). While this argument rejects the notion of
a hard-wired interest in social protection on the part of firms, and instead emphasizes
processes of ideational change, it shares with the skills interest thesis an emphasis on
the positive role of employers in social policy development. According to this view, employer support for social reforms reflected a sustained change in what they saw as being
in their economic interest (Münnich 2010: 313).
The political accommodation thesis
Scholars using a power resource or historical-institutionalist perspective have challenged
the skills interest thesis and developed an alternative theoretical perspective that highlights
the importance of political constraints and policy legacies as sources of business consent
to social reforms. They challenge employer-centered explanations on the grounds that
they ignore the impact of political constraints on preference formation (Korpi 2006: 202;
Hacker/Pierson 2002: 283; Huber/Stephens 2001: 189; Thelen 2002: 393–394). According to these scholars, changes in the overall power structure are what shaped employers’
policy positions. This approach differs from the skills interest thesis in its specification
of the reasons why employers accepted unemployment insurance. According to the political accommodation thesis, changes in political constraints motivated employers to
back unemployment insurance, rather than changes in economic interests or production
strategy. Hence, the changes in political constraints are the ultimate cause for employers’
backing of the reform, rather than the kind of production strategy they pursued.
This thesis, the political accommodation thesis, rests on the assumption that employers’ genuine preference was for a labor market free of any form of social protection.
This assumption rests on the decommodifying effects of social protection. Following
Esping-Andersen, decommodification is a policy outcome characterized by the fact that
“a person can maintain a livelihood without reliance on the market” (Esping-Andersen
1990: 22). Social protection decommodifies the worker – that is, it reduces his dependence on gainful employment. Decommodification also raises the reservation wage and
thereby undermines work incentives. Following a power resource perspective, we can
expect employers to oppose decommodification because it reduces the control of the
employer over his workforce. As Esping-Andersen has pointed out: “Decommodification strengthens the worker and weakens the absolute authority of the employer. It is for
exactly this reason that employers have always opposed decommodification” (Esping-
6
Andersen 1990: 22). In short, if this perspective is correct, we can assume that employers have an interest in preventing social protection for the unemployed.
Building on this assumption, the political accommodation thesis predicts that employers
endorsed the introduction of unemployment insurance for strategic reasons, not because they thought it would benefit production. When changes in the political context
narrow the policy options available, employers may come to endorse some policies as an
alternative to others that would be even worse. The narrowing of policy options is the
result of changes in the political balance of power that occurred in the past as well as in
the present. Past power structures are reflected in policy legacies. Present power structures are reflected in parliamentary majorities for or against a specific policy. Together
they can severely limit the options for change available to actors who seek it. As the literature on policy feedbacks argues (Skocpol 1992: 57–60; Pierson 1993: 595–628; Mettler 2002: 352–353), “new policies create a new politics” (Schattschneider 1974: 288).
On a conceptual level, the political accommodation thesis distinguishes between actors’
policy positions and their preferences. Hacker and Pierson, for instance, point out that
“a group’s actions often will not reveal its preferences but rather its strategic calculations
of what is the best that can be accomplished given existing circumstances” (Hacker/
Pierson 2002: 283). In a similar way, Korpi argues that employer-centered explanations
of welfare state reform have “mistaken employers’ consent to expansion as evidence for
their first-order preferences” for reform (Korpi 2006: 171). While policy positions are
empirically observable, preferences are not. This does not mean we cannot know anything about preferences. Rather, we need to infer preferences, relying on the behavior
we observe and our knowledge of the alternative options that would have been available
at that historical moment. Like the skills interest thesis, the political accommodation
thesis rests on a rationalist model of political action: that is, it assumes consistency
between means and ends. Assuming rationality, we can thus test different hypotheses
about preferences (ends) based on what they imply for observable positions (means).
The following subsection elaborates how the skills interest thesis and the political accommodation thesis have different empirical implications.
Main differences between the two explanations
The two explanations – the skills interest thesis and the political accommodation thesis – differ in the assumed rationales that motivated employers to back unemployment
insurance. The skills interest thesis explains employer consent to unemployment insurance with an economic rationale, the political accommodation thesis with a political
rationale. The economic rationale consists of the goal of promoting a better skilled and
more productive workforce. This rationale exists independently of the specific historical political context. The political rationale consists of the goal of maintaining political
influence in a context where policy options are constrained. By examining the relative
7
importance of economic and political rationales, this paper tries to contribute to a better understanding of how political actors come to define their policy positions in a given
historical situation.
The two explanations have observable implications. First, the skills interest thesis predicts that employers will justify their support for unemployment insurance by reference
to arguments about skills and labor productivity. The political accommodation thesis
predicts that employers will justify their backing by reference to strategic considerations.
Second, the skills interest thesis predicts that employer support for unemployment insurance will be relatively stable over time or change only gradually, as the size of sectors
that rely on specific skills grows. The political accommodation thesis, in contrast, predicts erratic changes in employer positions as they adjust strategically to what appears
politically feasible. Third, the two explanations have implications for the expected heterogeneity of employer positions. The skills interest thesis predicts a structural cleavage between sectors relying on specific skills and sectors relying on general skills or no
skills. The political accommodation thesis predicts that there will be a high degree of
uniformity between business positions across different sectors, as the negative effects
of decommodification affect all sectors. Political constraints also affect all sectors in the
same way. The political accommodation thesis therefore predicts uniform positions.
Hence, if the skills interest thesis holds true, we are likely to find employers articulating
their views primarily through their sectoral associations. If the political accommodation thesis holds true, we are likely to find employers articulating their views primarily
through their peak-level federations. In sum, therefore, the two competing explanations
have operationalizable empirical implications, which the following sections will test.
The testing of the two alternative propositions has wider implications for theories of
welfare state development. While the skills interest thesis intends to provide an alternative to the established power resource approach, the political accommodation thesis is
complementary to the latter approach. If business support for social policy had been
the result of genuine (first-order) preferences, then any explanation of the historical
evolution of the modern welfare state has to take into account the economic interests
of firms as one source of social protection. If, in contrast, business support had been
motivated by strategic considerations, then the political circumstances that motivated
this accommodation will turn out to be the crucial factor shaping the formation of the
modern welfare state, rather than the economic interests of firms. The two propositions
thus lead to different understandings of the actor motivations that shaped the development of modern political economies.
The following sections will test these two alternative propositions through a detailed
historical analysis of the introduction of unemployment insurance in Germany in the
Weimar Republic. I contend that Germany attains the status of a crucial case for solving
the controversy over employer interests in welfare state development. Labor market and
welfare state institutions in this country are often seen as archetypical for a type of regulated economy that benefits a high-skill/high-quality production strategy. Given the in-
8
stitutional advantages of unemployment insurance to high-skill/high-quality production in Germany, we are most likely to find employer support for the introduction of
this policy here. If, however, we find that this is not the case, it is likely that the thesis also
does not hold in other countries, where institutional advantages are less pronounced.
The following section elaborates why employers opposed unemployment insurance in
the Wilhelmine Empire (1871–1918); subsequent sections address the question of how
and why they changed their stances in the Weimar Republic.
3
The Wilhelmine Empire: Employers against unemployment insurance2
During the period of the Wilhelmine Empire (1871–1918), employers were strongly opposed to any form of support for the unemployed (CDI 1913: 2). After World War I, they
gradually changed their position and, after a period of wavering and internal indecision,
decided in 1926 to cooperate with the government in drafting an unemployment insurance bill. In 1892, Henry Axel Bueck, the influential executive director of the Central Association of German Industrialists (CDI) had called unemployment insurance a “monstrous project” (quoted in Faust 1986: 170). Three years later (1895), he declared that unemployment insurance was “decisively rejected” by the CDI (quoted in Faust 1986: 171).
This section first presents the positions of the major actors in the political debates about
unemployment insurance in the Wilhelmine Empire (1871–1918), before turning to the
reasons for employers’ opposition to unemployment insurance during that period.
The political debate
The issue of unemployment insurance first appeared on the political agenda during
the 1890s. At that time, state material support for the unemployed was very limited,
and laid-off workers often had to rely on union-run funds (Ghent schemes) instead.
From around the turn of the century, some municipalities started to provide subsidies
to union-run unemployment insurance schemes to alleviate the financial burden on
municipal relief programs (Hennock 2007: 308–314). A few towns also started to organize their own municipal unemployment insurance schemes (Hennock 2007: 315).
Most municipalities, however, were reluctant to establish such schemes and favored nationwide unemployment insurance instead (Führer 1990: 116–118).
2
For the reconstruction of the policymaking process in the following two sections, I rely on the
following studies by German historians: Faust (1986, 1987), Führer (1990), Lewek (1992), and
Wermel and Urban (1949). For the analysis of the positions of employers’ associations, I rely
on documents published by the associations (including policy reports, speeches, memoranda,
newspapers, periodicals, conference proceedings) as well as statements by individual business
representatives.
9
The first proposals for a nationwide unemployment insurance program came from academic social reformers. In 1894, the economist Georg Adler produced the first proposal
for a public unemployment insurance scheme, organized on a mandatory basis and
financed jointly by the state, employers and workers (Faust 1986: 151). However, this
proposal, as well as similar proposals by other reform-minded academics, did not receive much political endorsement. Support for these proposals came chiefly from the
municipalities, which hoped for a mitigation of the cost burden on municipal relief
works (Führer 1990: 114–116). However, no other major political actors supported unemployment insurance.
The Conservative Party, representing the interests of the landed aristocracy and agriculture, opposed unemployment insurance. Due to the massive migration of workers into
the cities, agriculture suffered from a labor shortage. The Conservatives suspected that
unemployment insurance would eliminate the incentives for unemployed urban workers to return to agriculture and, for this reason, sided with the employers. The National
Liberal Party, the party with the closest ties to industry, also rejected proposals for a
public unemployment insurance scheme, arguing that such plans would undermine
the sense of personal responsibility among workers. The Catholic Center Party, which
had a very heterogeneous social base, was internally divided and remained inactive on
this issue. Two small left-wing liberal parties, the Freisinnige Partei and the Deutsche
Volkspartei, considered supporting public unemployment insurance but remained, on
the whole, inert (cf. Führer 1990: 95–106 for the positions of the bourgeois parties and
the government).
Not only the bourgeois parties, but also the Social Democrats and the labor unions
opposed public unemployment insurance. They thought that the conservative government might use such a program to discipline workers and feared the crowding out of
the unions’ own Ghent schemes. At SPD party congresses in 1893 and 1894, a majority
of delegates voted against public unemployment insurance (Führer 1990: 52). Beginning around the 1890s, the social democratic labor unions had started to build up Ghent schemes, the main aim of which was to provide incentives for union membership
and to bolster the financial strength of unions during strikes. In 1891, 12.9 percent of
all union members were insured against unemployment by Ghent schemes; by 1905 the
share had increased to 65.6 percent and by 1913 to 81.3 percent (Führer 1990: 55).
Employers strongly opposed the Ghent schemes and campaigned against municipal
subsidies for them. They argued that Ghent schemes would serve as a tool to strengthen
social democratic unions, bolster the unions’ strike funds, and push up wages by controlling labor supply (Zahnbrecher 1914: 20–26). The employers’ association of Nuremberg-Fürth, for instance, argued that “unemployment benefits are a tool of combat. …
The Ghent system … aims to strengthen the social democratic unions in their fight
against German entrepreneurs” (Zahnbrecher 1914: 22–23). Despite their opposition
to the Ghent system, employers at that time did not promote public unemployment
insurance as a lesser evil. On the contrary, they argued against it.
10
The positions of employers
Two types of considerations motivated employer opposition to unemployment insurance in the Wilhelmine Empire: labor costs and work incentives (Zahnbrecher 1914:
34–35). With regard to the first concern, employers considered the impact on labor
costs to be too great. Industry pointed out that it had already accepted the introduction of several social programs in the 1880s and would now be unable to cope with any
further increases in labor costs (Faust 1986: 170; Zahnbrecher 1914: 34–35). Bismarck’s
social insurance reforms in the 1880s included programs for the protection of workers
against work injury, sickness, occupational disability and old age. Industry supported
these reforms as tools to pacify the working class (Bueck 1905: 791–795; Oechelhaeuser
1889: 109). The reforms failed to have the expected pacifying effect, however, as unions
continued to gain strength during the 1890s and 1900s. The Central Association of Industrialists (CDI) noted this fact with considerable dissatisfaction (Bueck 1905: 792).
Soon after Bismarck’s social reforms had been enacted, industry began to turn against
the further expansion of social insurance intended by the government. Industry leaders argued that the financial limits of social policy expansion had now been reached.
Higher labor costs would harm industry’s international competitiveness and lead to job
losses (Büren 1934: 60–86).
With regard to the second concern, employers believed that benefits for the unemployed
weakened work incentives and thus reduced labor supply. The employers’ association
of Nuremberg, for instance, argued that unemployment insurance would “degrade the
productivity of our people … The necessity to look for work would more or less cease”
(Zahnbrecher 1914: 34). Unlike programs that protect against other social risks, such
as old age or sickness, unemployment insurance protects workers who are capable of
working. For this reason, employers’ opposition to unemployment insurance was much
stronger than their opposition to other social programs.
Employers at that time suspected that the decline of workers’ dependence on work –
their decommodification, in other words – would promote the formation of an “army
of layabouts.” Consistent with this view, employers also blamed the occurrence of unemployment on deficiencies of the individual, such as laziness, rather than on macroeconomic conditions. Employers argued that unemployment was generally low and,
where it did occur, was usually the fault of the individual. Employer periodicals presented unemployment insurance as being merely a “premium on laziness,” financed by
the employer (VDA 1914: 18; also Deutsche Arbeitgeber-Zeitung 1919: 1; cf. also Faust
1986: 170–172). In short, employers at that time opposed unemployment insurance
because of its alleged negative effects on work incentives, in line with what the political
accommodation thesis predicts.
Employers used various arguments to make their case against unemployment insurance. The following paragraphs present statements found in the publications and peti-
11
tions of employers’ associations. These statements show that concerns about labor costs
and work incentives were behind employers’ opposition to unemployment insurance.
No structural unemployment. Industrialists denied the existence of widespread unemployment. According to a memorandum by the CDI, there was no need for unemployment insurance, because there would be a sufficient supply of jobs and everybody willing to work could find it (CDI 1913: 3, 15).
Regional imbalances. The same report suggested that unemployment primarily reflects
regional imbalances in labor supply, in particular due to the widespread rural exodus,
which led to labor shortages in agriculture and an oversupply in the cities (CDI 1913: 4).
The introduction of public unemployment insurance would encourage the rural exodus even further, as the problems arising from not being able to find a job in the cities
would be alleviated by unemployment benefits.
Rewarding idleness. The argument that unemployment insurance would benefit only
the “undeserving” was a recurring theme in the statements of business representatives at
that time. Unemployment would affect only those workers who were lazy, inept, incompetent or rebellious. In 1913, Fritz Tänzler, the executive director of the VDA, pointed
out that unemployment insurance would mean that the diligent workers (Tüchtigen)
would end up subsidizing the indolent (Mindertüchtigen) (Führer 1990: 84; for similar
statements cf. Zahnbrecher 1914: 25; Lewek 1992: 156–157).
Weakening the sense of personal responsibility. Congruent with this view, industrialists
also repeatedly voiced the concern that unemployment insurance would undermine the
sense of personal responsibility among workers. The following statement from a conference of employer-run labor exchanges (1903) reflects this view:
First of all, unemployment is not an evil, to the contrary, most people see work as an evil and
unemployment as the desirable state, and if one is reasonably protected from the material setbacks that tend to come along with unemployment, the larger part of the population will seek
to enjoy the blessings of the new insurance. (Reiswitz 1904: 54–55)
The petition by the employers’ association of Nuremberg-Fürth, mentioned above,
struck the same chord:
Insurance against the consequences of unemployment would have … the most disadvantageous
effects on workers’ sense of responsibility. It would destroy … the worker’s sense that he has a
duty of self-care. (Zahnbrecher 1914: 19)
These arguments about individual responsibility point to employers’ suspicions that
social benefits would make workers lazy.
Erosion of employers’ authority. Closely related to the fears, already mentioned, that benefits would make workers lazy were fears that benefits would erode employers’ author-
12
ity. If unemployment ceases to constitute a threat to the worker, the employer loses
an important disciplining device: dismissal. The worker will be less willing to make a
serious work effort if the prospect of unemployment becomes less frightening (cf. Faust
1986: 172 and Tille 1908: 26). The following statement made at the abovementioned
employers’ conference in 1903 illustrates this concern:
The means of maintaining [work] discipline, which the employer has at his discretion … are
reduced to a minimum, or are removed completely. The only right that remains to the employer,
although with qualifications and conditions, is that he may dismiss the worker, and that the
worker then is exposed … to the danger of unemployment. To avoid this danger, the workforce
will, after all, still make some effort. (Reiswitz 1904: 55)
Raising the reservation wage. Employers suspected that unemployment insurance would
raise the reservation wage. Alexander Tille, a representative of heavy industry, declared
in 1908 that unemployment insurance would prevent unemployment from pushing
down wages during times of economic crisis, thereby annulling the market mechanisms
of demand and supply (Tille 1908: 24). With the introduction of unemployment insurance, workers would no longer face a massive loss of income as a result of economic
crisis and therefore would be more reluctant to accept wage reductions during such
periods.
In sum, these views show the central importance of work incentives to the employers’
assessment: they feared the decommodifying effects of unemployment insurance. At
the same time, the sources do not provide evidence that employers wanted to protect
skill investments. On the contrary, employers argued that a skilled unemployed worker
should be obliged to accept jobs for which he was not trained, instead of being granted
a benefit. The petition by the Nuremberg-Fürth employers’ association asked rhetorically: “Should a skilled worker be considered unemployed and thus entitled to benefits
if he is unable to find work in his vocation, even though he could easily find work in a
related vocation?” (Zahnbrecher 1914: 29).
In short, the evidence for the pre-World War I period does not confirm the skills interest thesis, but it does provide evidence for the validity of the political accommodation
thesis. The protection of specific skills appears not to have played a significant role in
employers’ assessment of unemployment insurance at that time. Moreover, business
opposition to it appears to have been unanimous. Not only low-skill sectors (heavy industry, agriculture), but also high-skill manufacturing opposed unemployment insurance (Faust 1986: 175–177; Ullmann 1976: 153–154). The arguments employers used
against unemployment insurance show that their main concerns were to protect work
incentives and to keep labor costs low. They believed that unemployment insurance
would reduce labor supply in general rather than increase the supply of skilled labor.
4
13
The introduction of unemployment insurance in the Weimar Republic
Compared to the Wilhelmine Empire, the Weimar Republic provided a more favorable
context for the introduction of unemployment insurance. The range of policy options
available became more restricted for two reasons. First, the political balance of power
shifted in favor of public unemployment insurance. The unions began to support a
public scheme because their own Ghent schemes had run into financial problems as
unemployment rose. At the same time, the Social Democrats gained political influence
with the democratization of the political system. Moreover, the government bureaucracy changed its stance: while it remained passive on unemployment insurance before
World War I, it became an agenda-setter for reform in the Weimar Republic. Second,
the introduction of a means-tested program of unemployment assistance in 1918 had
changed the policy status quo, against which actors had to evaluate alternative options.
These two changes – the change in the balance of power and the new policy legacy –
constrained the policy options available: a return to the pre-war state of no benefits for
the unemployed lacked a political majority and was thus not feasible. The main options on the agenda were a continuation of (means-tested) unemployment assistance or
a shift to (earnings-related) unemployment insurance. Employers remained skeptical
about protecting the unemployed, but decided to adjust in order to avoid being sidelined in the debate. In contrast to before the war, they decided to accept the shift to the
insurance model, on the condition that means-testing remained. This section analyzes
the political debates in the Weimar Republic that led to the introduction of unemployment insurance and the positions of the employers.
The conditions for welfare state expansion in the Weimar Republic were favorable in
political terms, but unfavorable in economic ones. The democratization of the political
system after World War I gave the Social Democrats a chance to participate in national
government for the first time. At the same time, economic development was characterized by high volatility and recurring economic slumps. Throughout the period of the
Weimar Republic (1918–1933), real GDP per capita hardly ever returned to pre-war
levels (Schmidt 1998: 40). Unlike before the war, high levels of unemployment became a
permanent phenomenon. The economic disruptions of the demobilization period were
followed by a short inflationary boom during 1920–22, driven by a weak currency and
the resulting boost to exports (Feldman 1984: 55–66). This temporarily mitigated the
problem of unemployment. With the onset of hyperinflation in 1923, along with currency reform, unemployment began to rise again (Faust 1987: 264).
The introduction of a program of unemployment assistance in November 1918 shaped
the terms of the political debate about the pros and cons of unemployment insurance in
subsequent years. Unemployment insurance was now debated as an alternative to unemployment assistance, rather than as an alternative to no social protection at all. Unemployment assistance (Erwerbslosenfürsorge) was a program of means-tested benefits
for all non-employed persons above the age of 14. The government initially introduced
14
this program in 1914 as a temporary measure, intended to avoid a domestic political
conflict at a time when all efforts had to be focused on the war (Lewek 1992: 34). After
the war, when a Soviet-style revolutionary workers’ movement had emerged, the new
democratic government issued an emergency decree to make the program permanent
in order to pacify workers (Büren 1934: 198; Lewek 1992: 9, 49–55, 404). The program
provided means-tested, flat-rate benefits to all non-employed adults who declared
themselves available for work. The program was financed mainly by the municipalities.
The municipalities also had to administer the program and had substantial discretion
in applying the rules of benefit eligibility (Wermel/Urban 1949: 21–23).
The program of unemployment assistance became a crucial catalyst in making employers change their position on unemployment insurance. In subsequent debates, unemployment assistance changed the policy status quo in terms of which employers had
to evaluate unemployment insurance. Employers were highly dissatisfied with unemployment assistance and the way it was administered. In their view, the municipalities
did not sufficiently check need and willingness to work and handed out benefits indiscriminately. Since the municipalities were also in charge of social assistance, they had
little incentive to restrict the granting of unemployment assistance benefits, as doing so
would have shifted costs to the former.
The introduction of unemployment assistance had created a new reality for employers,
one that they perceived as even worse than unemployment insurance. Before the war,
the alternatives on the political agenda had been either unemployment insurance or
no compensation to the unemployed at all. Now, the alternatives on the agenda were
either unemployment insurance or unemployment assistance. Employers thought that
unemployment insurance was less hazardous to work incentives because it links benefits to previous earnings. In the policymaking process, the employers’ priority was to
limit benefit generosity. The following subsection deals with the political debates on
unemployment assistance and unemployment insurance between 1918 and 1927; in
Section 4, we will turn to the question of why employers viewed unemployment as less
problematic than unemployment assistance.
The political debate
The initiative for the introduction of unemployment insurance after World War I came
from the government and the ministerial bureaucracy, driven largely by a strategy of
shifting costs. The Social Democrat-led government saw the introduction of unemployment assistance in November 1918 as a temporary solution, to be replaced by a program of unemployment insurance in due course. The government’s main motivation
for promoting unemployment insurance was to alleviate the cost burden on the state by
shifting some of the expense to capital and labor. Unemployment insurance would need
15
to be financed by workers and employers through payroll taxes, while unemployment
assistance was initially financed by tax revenues.
As early as August 1919, the Minister of Finance, Matthias Erzberger (Center Party),
noted the “dismal experiences” the government had had with unemployment assistance
and demanded the introduction of unemployment insurance “as soon as possible” to
alleviate the burden on public finances (Führer 1990: 171). Four years later, in September 1923, Rudolf Hilferding, the Social Democrat Minister of Finance, called the
introduction of unemployment insurance an “essential requirement” to deal with the
“catastrophic financial situation of the state” (Führer 1990: 181). By shifting the compensation of the unemployed from the assistance to the insurance principle, the government intended to shift the financial burden to employers and employees.
The period during which the debate took place was characterized by extraordinary political uncertainty, which delayed the policymaking process. The Ministry of Labor had
produced a first internal draft for an unemployment insurance bill in November 1919. All
in all, it took three government bills and several revisions before parliament passed unemployment insurance in 1927. Two things facilitated the adoption of the program: First,
the Minister of Labor’s commitment to the reform provided continuity to the reform
process. Despite the frequent changes in government composition, Heinrich Brauns from
the Center Party was Minister of Labor during the entire reform period and followed up
the reform process. Second, in spite of the frequent changes in government, there was a
stable parliamentary majority in favor of unemployment insurance. Before the war, most
parliamentary parties had either opposed unemployment insurance (National Liberals
Table 1 Distribution of parliamentary seats 1920–1928 (%)
Election (month/year)
Legislative period
NSDAP
DNVP
DVP
Center
DDP
SPD
USPD
KPD
Others
06/
1920
I.
05/
1924
II.
12/
1924
III.
05/
1928
IV.
–
15
14
14
8
22
18
1
8
7a
20
10
14
6
22
–
13
9
3b
21
10
14
6
27
–
9
10
2
15
9
12
5
31
–
11
15
Parties in bold voted in favor of the unemployment insurance law.
NSDAP: National Socialist German Workers’ Party; DNVP: German National Peoples Party; DVP: German Peoples Party; DDP: German Democratic Party; Center: Zentrum; SPD: Social Democratic Party; USPD:
Independent Social Democrats; KPD: Communist Party. Smaller parties
are aggregated. Numbers do not always add up to 100 due to rounding errors.
a Including seats of the nationalist “Völkische” Party.
b Joint list together with Bavarian People’s Party.
Source: Adapted from Preller (1949: 180). Data checked with Gonschior (2005) for errors.
16
Table 2 Business representatives in the Reichstag (1928)
Parties
German National People’s
Party (DNVP)
German People’s Party
(DVP)
Center Party (Catholic)
Democratic Party (DDP)
Bavarian People’s Party
Economic Party
Total
Deputies affiliated
with industry
Deputies affiliated
with sectors other
than industry
Total number of probusiness deputies
9
9
18
15
8
23
3
8
1
1
6
3
1
12
9
11
2
13
39 (out of 491)
76 (out of 491)
37 (out of 491)
The total number of seats in the Reichstag was 491; pro-business deputies thus made up about 16 percent
(or 76 deputies) of the parliament.
Source: Adapted from Lewinsohn (1931: 93–94).
and conservative parties) or had been internally divided (Social Democrats and Center).
In the Weimar Republic, in contrast, a majority of parties came to support unemployment insurance. The Center Party had overcome its pre-war disagreement and had become an advocate of unemployment insurance. The non-socialist parties were generally
discontented with unemployment assistance, and saw unemployment insurance as an
effective way of improving control over benefit recipients (Führer 1990: 171).
Importantly, the Social Democrats also changed their position. The majority of the Social Democratic labor unions abandoned their pre-war demands for a state-subsidized
Ghent system and now supported a public insurance solution instead. The occurrence
of mass unemployment during the first months of the war and during the demobilization period had confronted the unions’ Ghent schemes with massive financial problems, which made them turn away from these schemes (Wermel/Urban 1949: 24–25).
At the same time, the democratization of the state had allayed labor’s suspicions about
the use of unemployment insurance as a tool to repress the labor movement.
Both aspects facilitated labor’s shift in favor of public unemployment insurance (Lewek
1992: 172–173). In December 1921, the majority of the unions organized in the Federation of Social Democratic Labor Unions (ADGB) voted in favor of a shift from assistance to insurance (ADGB 1921: 19). A majority of social democratic unions had thus
supported the introduction of mandatory public unemployment insurance, financed
by payroll taxes and administered together with employers on a parity basis.
A coalition between the Social Democrats, the Center Party and other smaller centrist
parties in favor of unemployment insurance thus emerged and resulted in a stable parliamentary majority (see Table 1). The right-wing nationalist German National Peoples’
Party (DNVP), which represented, among other groups, agricultural employers, as well
as the Nazis (NSDAP) and the Communists, remained opposed to unemployment insurance.
5
17
Changing employer positions in the Weimar Republic
During the Weimar Republic, the two national employer federations (VDA and RDI)
abandoned their pre-war opposition to unemployment insurance (VDA 1923: 35–36),
and cooperated with government in the drafting of the final bill (Lewek 1992: 231).
Why did the employers change their minds?
A combination of two factors explains the change: (i) the introduction of the program
of unemployment assistance in 1914/18, disliked by employers, and (ii) the emergence
of a clear political majority in favor of unemployment insurance. As the following subsection shows, employers disliked unemployment assistance because they had little control over who received benefits. However, unemployment assistance turned out to be
difficult to dismantle, because a political majority in favor of unemployment insurance
had emerged after the Social Democrats and the Center Party had made up their minds.
Both parties had been undecided or internally divided about unemployment insurance
before the war. With the democratization of the political system after the war and the
changes in the positions of the Social Democrats and the Centre Party, employers now
confronted a stable majority in favor of unemployment insurance.
Because of the changed political majorities, a return to the pre-war state – no social protection for the unemployed – was no longer politically viable. Once employers realized
that the outright dismantling of unemployment assistance was not politically feasible,
they decided to back the adoption of unemployment insurance as their “lesser evil.” By
endorsing unemployment insurance and cooperating in its adoption, they hoped to
be able to influence details of a reform that would help them to get rid of the disliked
assistance scheme. The following subsections analyze why employers considered unemployment insurance less problematic than unemployment assistance and how they tried
to influence the reform process.
Unemployment insurance vs. unemployment assistance
Industrialists preferred unemployment insurance to unemployment assistance because
of the differential effects of these two programs on work incentives. The kind of arguments employers used against unemployment assistance after 1918 were the same as
those used against unemployment insurance before the war. Unemployment assistance
would benefit only “layabouts” and erode workers’ willingness to work. They suspected
that unemployment assistance would promote idleness and destroy the sense of self-reliance among workers. They suddenly began to see unemployment insurance as a lesser
evil: while unemployment assistance was granted to everyone claiming to be seeking
work, unemployment insurance was linked to workers’ employment record. This meant
that the work requirement (“willingness to work”) was easier to control in an insurance
scheme than in an assistance scheme.
18
This suspicion was furthered by the municipalities’ indiscriminate granting of benefits
to all who declared themselves willing to work. No record of previous employment was
required. Although recipients were obliged to accept work if offered, in a period of high
unemployment a person’s willingness to work was in practice difficult to prove. Employers resented the fact that they had no influence over the granting of benefits. Municipalities had little incentive to check benefit eligibility carefully, as they were also in
charge of social assistance. Careful checking would merely have shifted costs from one
program to another. In short, employers opposed unemployment assistance because it
had a strong decommodifying effect on workers.
Inspired by social Darwinist thinking, employers thought that means-tested assistance
programs would promote the “survival of the unfittest.” If there were no assistance benefits, they reasoned, there would be fewer “unfit” persons in the first place. They suspected that assistance would damage individual workers’ energy and capacity for selfreliance (Eigenverantwortung). The following statement by Ernst von Borsig, president
of the VDA from 1924 to 1931, illustrates this argument:
It is possible that without the social assistance provided by the state perhaps 50,000 people will
perish who manage to get by with the help of this assistance. But it is also possible that, if this
assistance did not exist, four to five thousand other people would develop their capacities and
energy in such a way that this would be – seen purely from an economic point of view – even
more valuable. (Borsig quoted in Führer 1990: 206)
The arguments used by industry against unemployment assistance in the Weimar Republic were thus very similar to the arguments used before the war against unemployment insurance (see Section 2). While they accepted social benefits for those who were
truly “willing and able to work,” employers distinguished clearly between “deserving”
and “undeserving” claimants.
Faced with unemployment assistance, employers abandoned their pre-war opposition
to unemployment insurance and began to see the latter as the least bad option. The
payment of unemployment insurance benefits required a record of previous employment and was thus less likely to erode work incentives. In a reversal of their pre-war
position, employers now discovered the advantages of unemployment insurance. However, employers’ support for unemployment insurance was half-hearted, as shown in
detail in the following subsection: they liked the fact that benefits were to be tied to the
employment record, but wanted to keep benefits means-tested, resulting in a hybrid of
insurance and assistance.
In December 1920, the peak-level industry federation (RDI) declared that unemployment assistance was “necessarily seen as alms [by the recipient] and, in the long run, undermines the self-confidence and sense of personal responsibility of the workforce.” For
this reason, it should be replaced by “mandatory public insurance against unemployment as soon as possible” (decision by the RDI executive board on December 16, 1920,
19
printed in RDI 1921). Principled objections against unemployment insurance could
no longer be accepted as being of paramount importance. In much the same way, the
Chambers of Commerce in the Ruhr area declared in a joint memorandum in October
1920 that unemployment assistance would be “demoralizing, because it allows the state
to take sole care, while insurance would encourage the wage-earner to practice selfhelp and would keep alive the idea of self-reliance in him” (inquiry by the Chambers
of Commerce of Bochum, Dortmund, Duisburg-Wesel and Essen to RDI and DIHT,
October 19, 1920; cf. DIHT 1920: 56).
Despite their preference for insurance over assistance, employers initially continued to
oppose the introduction of a new insurance program. They suspected that the resulting
increase in labor costs would be too high during what was then a period of high unemployment. The following subsection shows how strategic considerations motivated the
VDA to finally abandon its opposition to unemployment insurance and to participate
in the drafting of the government bill.
The role of strategic accommodation
As Table 3 shows, employers in the Weimar Republic turned from opponents to supporters of unemployment insurance. They initially tried to dismantle unemployment
assistance, but failed. They decided to back the adoption of unemployment insurance
as their second-best approach to eliminating unemployment assistance. While they
publicly justified this shift with moral obligations to support those in need, internal
deliberations show the importance of strategic considerations. In 1920, the social policy
committee of the Federation of German Industry (RDI) discussed the issue of unemployment insurance. At a meeting of this committee, its speaker, the plant director Hubert Hoff, invoked two arguments in favor of unemployment insurance. First, there
would be only two options available, unemployment insurance and unemployment
assistance. The third option, a dismantling of unemployment assistance without any
substitute, would not have “a reasonable chance of success.” Second, unemployment
insurance would be “the lesser of the two evils,” because “if the system of unemployment assistance is continued, the employer has no influence on the use of the funds”
(minutes of the RDI executive board meeting on December 16, 1920). With 16 votes
in favor and five votes against, the RDI’s social policy committee decided to endorse
the introduction of unemployment insurance. Subsequently, the RDI’s executive board
ratified this decision, with only one vote against (RDI 1921). The internal deliberations
of the RDI thus show clearly that strategic adjustment to political constraints motivated
the endorsement of unemployment insurance.
Strategic motivations are rarely admitted in official statements and publications.
However, statements by individual business representatives provide further evidence
of the importance of strategic considerations. The executive director of the Associa-
20
Table 3 Changes in employers’ position in the Weimar Republic
Date
Events
Up to 1914
Dec. 1914
Unions’ positions
Employers’ positions
Most unions were pro
Ghent and contra public
UI.
Employers were uniformly contra
any UI (public or Ghent) (see text
for sources).
UA adopted temporarily
for duration of war
(Kriegswohlfahrtspflege).
March 1918
Nov. 1918
VDA opposes union demands for
public UI as a “pension for the
unemployed” (VDA 1918).
Validity of UA extended
to post-war period under
impression of revolutionary
forces
1918
Social Democrats and
ADGB abandon Ghent
model and call for a
public UI instead.
August 1919
MoF demands adoption of UI
to ease financial pressure on
municipalities.
Nov. 1919
MoL presents 1st draft for
UI bill.
April 1920
VDA informs MoL that a majority
of its members oppose the UI bill.
May 1920
RDI “hopes” that parliament will
vote against the UI bill.
Dec. 1920
RDI proposes UI as substitute for
UA (RDI 1921).
Sept. 1921
MoL presents 2nd draft for
UI bill.
Dec. 1921
Oct. 1923
Majority at ADGB
congress votes in favor of
public UI.
Payroll tax to finance UA was
introduced.
1924
VDA demands reduction in social
expenditures (VDA 1925a: 91).
VDA calls on government to halt
adoption of UI for reasons of cost
(VDA 1924: 3–4).
Jan. 1925
Oct. 1925
VDA social policy committee
discusses change in position
because opposition “hopeless”
(meeting on January 27, 1925).
MoL presents 3rd draft for
UI bill.
1926
July 1927
VDA cooperates in the drafting of
the final government bill.
National parliament passes
UI bill.
Sources: Author’s own compilation based on Führer (1990), Lewek (1992), Wermel/Urban (1949), Faust (1986, 1987)
and sources mentioned in the table.
MoL: Ministry of Labor, MoF: Ministry of Finance, ADGB: Federation of German Labor Unions, VDA: Federation of
German Employer Associations, RDI: Federation of German Industry, UI: unemployment insurance, UA: unemployment assistance scheme (Erwerbslosenfürsorge).
21
tion of the Berlin Metal Industry, Stefan Oppenheimer, said at a conference of policy
experts in 1925:
The employers’ side understands that, given the proposals put forward by all political parties, it
would be completely useless to take the position that we do not want any unemployment insurance. Therefore, the position of the employers is to say merely: unemployment insurance has to
remain within tolerable limits, and it is our duty to point out the dangers that it could pose to
the economy. (Oppenheimer from the Association of Berlin Metal Industrialists, in Jastrow/
Erdmann/Spliedt 1925: 113)
Similarly, the social policy committee of the VDA thought that a strategy of fundamental
opposition would stand “no reasonable chance” of succeeding in the long run (meeting
of the VDA social policy committee, January 27, 1925: VDA 1925b). The German Diet
of Industry and Commerce (DIHT) declared in October 1920 that it had “substantial
fundamental objections” to unemployment insurance, but would nonetheless be ready
to participate in the drafting of the law. A list of demands intended to restrict benefit
generosity and costs followed (DIHT 1920: 56).
Strategic arguments also played a role among those employer groups who decided to
continue to oppose unemployment insurance. The position taken by Adolf Haeusser illustrates this point. Haeusser was the only member of the RDI’s executive board
who voted against unemployment insurance at the decisive meeting mentioned above.
He represented the chemical industry and was chairman of IG Farben (Wolff-Rohé
2001: 442). Hauesser justified his support for unemployment assistance on the grounds
that it would be “an imperfect regulation, and precisely for this reason it will soon be
dismantled. Whereas unemployment insurance, once introduced, cannot be dismantled
anymore” (minutes of the meeting of the RDI executive board on December 16, 1920).
Unlike a majority of German industrialists at that time, he considered the shift in political power to be of a temporary nature and, for this reason, clung to industry’s pre-war
position of opposition to unemployment insurance.
The employers’ role in policymaking: cost containment
and strategic accommodation
The shift in the position of employers towards supporting unemployment insurance
could have led to a cross-class alliance, as a majority among the unions also favored unemployment insurance. Indeed, in October 1921, unions and employers unanimously
called upon the government to substitute insurance for assistance (meeting of the ZAG
executive board October 13, 1921: VDA 1921). However, employers rejected a bill on
unemployment insurance presented by the Ministry for Labor in April 1920 as too costly and too generous (Brandt 1920: 1395; cf. also VDA statement April 24, 1920, quoted
in Lewek 1992). In other statements from 1923 and 1924, the VDA again called upon
22
government “to refrain, for the time being, from plans to introduce unemployment
insurance for financial and organizational reasons” (VDA 1924: 4).
Changes in the unemployment assistance scheme, however, made this program even
more problematic for employers and the shift to an insurance program less so. To alleviate the pressure on public finances, the government introduced a payroll tax to finance
unemployment assistance in October 1923. Two-thirds of the costs of unemployment
assistance were to be financed by workers and employers in equal shares, whereas the remaining third was to be financed by the municipalities and subsidies from the regional
and federal state level (Preller 1949: 364). This decision did not require parliamentary
approval. In effect, these changes turned unemployment assistance into a hybrid program, combining elements of insurance with elements of assistance. This change made
the switch to unemployment insurance seem even more appealing to employers, since
they now had to contribute to supporting the unemployed in any case.
In 1926, the VDA finally abandoned its opposition to the introduction of unemployment insurance, and offered to cooperate with the government in the drafting of the bill
(VDA 1926). As mentioned earlier, a strong parliamentary majority in favor of unemployment insurance already existed at that time (see Table 1). As shown in the previous
subsection, employers realized that they stood no chance of dismantling unemployment assistance. Trying to influence details of the insurance option was the best option
available to them. By participating in the drafting of the bill, the VDA expected to have
a greater chance of influencing policymaking, compared to outright opposition (meeting of the VDA social policy committee on January 27, 1925: VDA 1925b). Indeed, the
VDA succeeded in changing some rules and in the end decided to endorse the bill the
government presented to parliament in July 19273 (Erdmann 1927: 347).
The VDA’s demands focused on containing the cost impact of the new program. As already mentioned, the VDA suspected that the new program would increase labor costs
substantially. VDA executive director Gerhard Erdmann emphasized that “legal provisions need to be created to prevent the costs of unemployment insurance getting out of
3
The law on unemployment insurance and employment services, passed in July 1927, consisted
of two parts: the first part established the new unemployment insurance program, while the second reformed the organization of labor market policy by establishing a new public authority for
this purpose, the new National Office for Employment Services and Unemployment Insurance.
The placement of unemployed workers and the granting of unemployment insurance benefits
were united in one organization. The new authority was governed by tripartite decision-making
bodies, including workers, employers and the state, on a parity basis. Unemployment insurance
benefits were granted only to those who were “involuntarily unemployed,” were “willing and
able to work,” and had been employed for at least 26 weeks during the last 12 months. Benefit payment was limited to 26 weeks. Benefit levels were earnings-related and means-testing
was abolished (Faust 1987: 276). Compared to unemployment assistance, the new law thus
improved employers’ control over the use of funds and the granting of benefits and at the same
time reduced the decommodifying character of social policy by linking benefits to previous
employment.
23
hand” (Erdmann in Jastrow/Erdmann/Spliedt 1925: 26–27). Employers urged policymakers to keep benefit levels moderate and to define entitlement criteria restrictively.
Remarkably, the VDA wanted to keep benefits means-tested. The VDA endorsed the
shift from assistance to insurance, because an insurance program tied benefits to employment and allowed for better control of benefit recipients. Nevertheless, the VDA
insisted that insurance benefits should be means-tested in order to limit costs. Contribution payments should not establish benefit rights (VDA 1924: 3; Erdmann in Jastrow/Erdmann/Spliedt 1925: 32; cf. also Lewek 1992: 231). Employers’ support for the
insurance principle was inconsistent: they wanted benefit entitlements to be restricted
to those paying contributions, but did not want workers to derive any legal entitlements
towards benefits from the contributions they paid. This observation confirms that the
intention to get rid of assistance motivated employers to back unemployment insurance, rather than any genuine belief in the insurance principle – that is, the principle of
equivalence of contributions and benefit rights.
Some of employers’ demands directly contradict the skills interest thesis. The controversy over “job suitability rules” provides the clearest evidence in this respect. Job suitability rules define what kind of job an unemployed person can reject without losing
his benefits. The third government draft (1925) included a provision that required the
labor market agencies to take into account a person’s vocational training and previous
occupation when deciding what kind of job offers the person would need to accept
(Lewek 1992: 269). Employers objected to this rule: “Concerning job suitability, previous vocational training should not be taken into consideration” (VDA 1926: 36). To
contain program costs, the unemployed should be obliged to accept any job, including
jobs in a different region or a different vocation (VDA 1926: 36R). The VDA also argued that labor market agencies could not be relied upon to implement job suitability
rules consistently. In short, the employers’ federation was not interested in protecting
skill investments. Rather, the federation feared that job suitability rules raised levels of
unemployment and hence made the program more costly. Similarly, the German Diet
of Industry and Commerce rejected restrictions on what qualifies as a “suitable job”
(DIHT 1920: 56).
To sum up, employer support for unemployment insurance was strategic rather than a
reflection of a genuine preference for protecting the unemployed.4 Remarkably, argu4
While the employer federation (VDA) had officially endorsed the bill, several parliamentary
deputies representing business interests voted against the bill or abstained from voting. Most of
them belonged to the right-wing nationalist DNVP. Most of these votes came from agricultural
employers, who did not want to participate in the unemployment insurance scheme because
most agricultural workers would not have qualified for benefits. Some of the votes against the
law, however, also came from big industry, for example from the coal mine director Bernhard
Leopold. Among those industry deputies abstaining from the vote was the executive director
of the Association of German Iron and Steel Industrialists (VDESI), Jacob Reichert (Liesebach
1957: 116). Politically right-wing but from diverse sectoral backgrounds, these employers did
24
ments about the protection of skill investments did not play a prominent role in the
debate. Instead, the arguments used by business representatives in favor of unemployment insurance focused on strategic considerations; most importantly, the desire to get
rid of unemployment assistance. Given the clear parliamentary majority in favor of the
bill, employers’ support was not crucial for its passing.
Reform of the new unemployment insurance system
The political compromise in favor of unemployment insurance turned out to be very
short-lived. Soon after the passing of the law, unemployment started to soar as a result
of the onset of the Great Depression in 1929. The number of unemployed persons increased from about 1.2 million in June 1927 to about 6.1 million in March 1932 (Preller
1949: 166–167). The contribution rate (3 percent) had initially been set in such a way
that the program would be able to support up to 800,000 unemployed persons (Faust
1987: 276). The number of unemployed persons soon started to exceed the maximum
the program was designed for. Policymakers had thus grossly underestimated the level
of future unemployment. The law obliged the federal state to cover revenue shortfalls by
providing loans to the insurance administration. This meant an ever-growing burden
on the federal budget.
The massive deterioration in the finances of unemployment insurance led to a heated
controversy over how to reform the program. Employers revoked the 1927 compromise
and demanded massive cutbacks to contain the increase in social expenditure. Positions
among the political actors on how to reform unemployment insurance differed greatly
and developed into what was perceived by the Social Democrats as a conflict over the
principles of the German welfare state. Labor unions and the SPD insisted on increases
in contribution rates, while employers and the DVP (German Peoples Party) demanded
substantial cost cuts to solve the fiscal problems.
Employers focused on two demands. First, seasonal unemployment should be excluded from unemployment insurance benefits. Second, means-testing of unemployment
insurance benefits should be reintroduced (Büren 1934: 211–212). Employers thus
abandoned the insurance principle and demanded a return to the assistance principle
instead. In 1930, the executive director of the RDI, Ludwig Kastl, complained that unemployment insurance would “eliminate the mechanisms of demand and supply on
the labor market” and for this reason it would have become impossible to “adjust wages
not support the compromise endorsed by the VDA. Given the overwhelming majority in favor
of the law, however, these business deputies refrained from fighting for their cause. As we will
see in the following subsection, the passing of the law was not the end of the debate. Less than
two years after the passing of the law, the onset of the economic depression led employers to
revitalize their campaign against unemployment insurance.
25
in line with business-cycle developments” (quoted in Weisbrod 1978: 210). The shortlived nature of the employers’ endorsement of unemployment insurance underlines
its strategic nature. Employers endorsed unemployment insurance because it was their
fall-back option, not because they thought it would help them to create the kind of
workforce they wanted.
6
What motivated industry to change its position on unemployment
insurance?
Before World War I, employers had unanimously opposed unemployment insurance.
In the Weimar Republic, they came to accept it. What motivated them to change their
minds? This section summarizes why employers reversed their position and discusses the
relevance of strategic and genuine preferences in motivating their political decisions.
The change in the employers’ position was a response to a set of profound changes in
the political context that had happened after the war. The analysis in this chapter has
highlighted two specific changes: first, the introduction of unemployment assistance in
1914/1918 and second, the emergence of a stable political majority in favor of unemployment insurance facilitated by the regime change of 1918. The introduction of unemployment assistance in 1918 had established a policy legacy that, in interaction with
the political majority in favor of unemployment insurance, made a return to the pre-war
situation – no social protection for the unemployed – politically unrealistic. The options
on the agenda were now these: continuation of assistance or switch to insurance.
As this paper has shown, employers’ opposition to social protection derived from its decommodifying effects. Unemployment benefits reduce people’s dependence on gainful
employment. For this reason, employers were reluctant to accept social benefits for the
unemployed. They suspected that social benefits would reward “work-shy shirkers” (arbeitsscheue Drückeberger). Once workers were able to get by without working, a good
many of them would refuse to accept any work. Protecting workers against the risk of unemployment was acceptable to employers only on condition that a way would be found to
pay benefits only to those workers that were truly “involuntarily unemployed” and truly
“willing and able to work.” Employers considered that great care was necessary to make
sure that those not fulfilling these criteria – the “shirkers” – would not receive benefits.
In this respect, unemployment insurance was the lesser evil for them compared to unemployment assistance. The reason for this is that the two programs differ in the extent
to which they enable the unemployed to make a living without employment. The work
obligation of benefit recipients can be enforced more effectively in an insurance scheme
than in an assistance scheme. Unemployment assistance required no record of previous
employment. For the low-skilled, the level of flat-rate benefits tended to approach wage
26
levels, which eliminated their work incentives (Preller 1949: 365). In contrast, insurance benefits were tied to employment record and earnings, making them less prone to
reward idleness.
During periods of high unemployment, controlling the willingness of benefit recipients
to accept work is difficult. The way the assistance program was administered exacerbated this problem. The municipalities were unilaterally in charge of the program. Employers criticized them for not carefully enforcing the work obligation rule. In practice,
the municipalities had little incentive to enforce it, as denying benefits would merely
have shifted the cost burden to the municipal poor relief programs. The administration
of unemployment assistance thus denied employers any influence over the granting of
benefit payments.
In short, an insurance scheme maintains a greater dependence on gainful employment
than an assistance scheme. Framed in terms of a need to maintain the “sense of personal
responsibility” and self-reliance among workers, employers wanted to protect work discipline and work incentives. Social protection was a threat to this aim. Before the war,
when no social protection against unemployment had existed, employers’ objective had
been to preserve the policy status quo. After the war, when the introduction of unemployment assistance decommodified the unemployed even more than unemployment
insurance would have done, the employers’ objective was to dismantle the former.
The second component in the explanation of the change in employers’ attitudes towards unemployment insurance is the shift in the political center of gravity in the Weimar Republic compared to the Wilhelmine Empire. The authoritarian government of
the Wilhelmine Empire had been reluctant to engage with the issue of unemployment
insurance, while a majority of parliamentary parties had either opposed it (National
Liberals, Conservatives) or had been split (Center, Social Democrats). After the war, the
Social Democratic labor movement turned away from the Ghent system because these
schemes ran into financial troubles due to high unemployment. Instead, the SPD and
the majority of the unions now endorsed public unemployment insurance (Wermel/
Urban 1949: 24–25). The German People’s Party and the Center Party, two predecessors of today’s Christian Democrats, now endorsed the introduction of unemployment
insurance. The balance of power had thus shifted against the preferences of employers
and blocked a return to the status quo ante.
Employer opposition to unemployment assistance alone was not sufficient to convince
them to back the insurance option. Additionally, the insight that a strategy of radical
opposition would mean fighting a losing battle was important in persuading employers
to cooperate in the drafting of the new program. The resulting political compromise
remained short-lived. The economic depression that started in 1929 precipitated a massive financial crisis in the new insurance program. These reversals would have been
unlikely if employers’ support for unemployment insurance had been motivated by a
genuine preference for unemployment insurance (Büren 1934: 208–209).
27
Evaluation: Skills interests or strategic accommodation?
In short, the historical evidence shows that strategic accommodation is a better explanation of employers’ acceptance of unemployment insurance than an interest in skill
investments. There appears to be little evidence for the hypothesis that an interest in the
protection of skill investments motivated employers to endorse unemployment insurance. On the contrary, as the evidence presented shows, employers rejected limitations
on job suitability, which would have prevented unemployed workers from having to
switch occupations. In addition, arguments about the protection of skill investments
appear not to have played a central role in the debates leading to the introduction of unemployment insurance. Employers were aware that prolonged unemployment can lead
to an erosion of past skill investments (VDA 1927: 136). However, they did not consider
social benefits as a means of solving this problem. Instead, they thought that better job
placement services and public works projects would help to retain skills.
Although direct archival evidence for the skills interest thesis is weak, underlying structural changes in the composition of industry during the Weimar Republic may possibly
have facilitated employers’ policy reversal, as suggested by Mares (Mares 1996b: 30). The
newer manufacturing industries were more skill-intense compared to older heavy industry, and for this reason may have been more open to social protection. We therefore
need to look at the relative importance of skill-intensive industries during the Weimar
Republic. Here, I use the same definition of skill-intensive sectors as Mares (1996b: 30):
chemicals, machine tools and electrical engineering. At the time unemployment insurance was introduced, only about 16 percent of total industrial output came from these
sectors (see Table 4). Skill-intensive sectors seem not to have dominated industry at that
Table 4 Sectoral composition of the German Economy (1927/28)
Sector
Mining
Nonmetallic mineral processing
Iron and steel production
Mechanical engineering and car manufacturing
Electric engineering
Chemical engineering
Textiles
Clothing
Paper and pulp
Leather
Rubber
Timber industry
Food
Energy utilities
Construction
Others
Total
%
10.0
4.1
10.3
8.2
4.1
3.8
7.6
5.8
5.8
1.7
0.6
4.1
14.7
2.1
11.4
5.7
100.0
Share of sector as a percentage of total industrial output; sectors in bold are
those relying on highly-skilled labor.
Source: Adapted from Weisbrod (1978: 34, Table 1).
28
time. Therefore, concerns about the protection of skill investments are unlikely to have
been the main factor explaining why employers decided to change their minds in the
Weimar Republic.
7
Conclusions
This paper has investigated the question of why employers came to accept the adoption
of unemployment insurance in the Weimar Republic. The paper tested two alternative
explanations: the skills interest thesis and the political accommodation thesis. I have
argued that the political accommodation thesis is better able to explain why employers
accepted the introduction of unemployment insurance than the skills interest thesis.
While in public statements, employers sometimes emphasized the moral need to support the unemployed, internal protocols document the primacy of strategic considerations. Remarkably, employers also were the last of the major political actors to back to
the introduction of unemployment insurance, as shown in Table 3. Employers adjusted
their policy stances to the constraints and opportunities of the historical moment. By
doing so, they temporarily came to back the adoption of unemployment insurance.
However, their underlying preference remained unchanged: to protect work incentives
by keeping social protection weak.
The historical findings show that changes in political challenges largely shaped the kind
of policy options employers supported, rather than changes in their economic interests
or normative orientation. During both periods analyzed in this paper – the Wilhelmine
Empire and the Weimar Republic – employers’ basic preference with respect to social
policy appears to have been to protect work incentives. While this preference against decommodification remained unchanged throughout the entire period, changes in political context made this basic preference translate into very different policy positions. In
the Wilhelmine Empire, opposition to decommodification translated into opposition to
unemployment insurance; in the Weimar Republic, it translated into qualified support
for unemployment insurance. Two developments had constrained the policy choices in
the Weimar Republic: first, the policy legacy of unemployment assistance, established in
1914/18; and second, the emergence of a political majority in favor of unemployment
insurance. Together, these two changes limited the options available to employers.
The empirical findings in this paper have broader implications for the study of the
political origins of institutions that today are often portrayed as providing competitive advantages to firms in “coordinated market economies.” Today, specific social policies, like unemployment insurance, may provide advantages to industries using specific
skills. However, the historical findings suggest that an intention to improve economic
productivity cannot serve as a causal explanation for the scope or generosity of social
protection. The development of comparative institutional advantages results not from
29
“intelligent design,” but is most likely the unplanned result of processes of adjustment
by individual firms to institutional constraints that have their origins in past political
conflicts. However, further research appears necessary to find out whether the adjustment of production strategies over time did, in the long run, lead to a genuine change
in employer preferences.
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M.-L. Djelic, S. Quack (eds.)
Transnational Communities:
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Cambridge University Press,
2010
DP 10/13
L. Gruss, G. Piotti
Blurring the Lines: Strategic
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